City, state auditor general disagree about funds

There's a little matter of $23 million standing between the city of Yuma and the state auditor general's office, a difference of opinion that could result in a penalty of nearly $3 million for the city if the matter isn't resolved in its favor.

The issue stems from funds the city spent on several major capital improvement projects in fiscal year 2006-07 with the intent of reimbursing the interim expenditures through bonds that were sold the next fiscal year.

According to the auditor general's office, this resulted in the city exceeding its expenditure limitation for the year and it therefore violated a law approved by Arizona voters in 1980.

The law, which became Article IX, Sections 20 and 21 of the Arizona Constitution, was intended to limit expenditures of "local revenues" after 1980 to "base limits." The base limit was actual expenditures by a municipal government such as the city of Yuma in fiscal year 1979-80, allowing for annual adjustments for population and growth.

Because the expenditures in dispute exceed the limit for the year by more than 10 percent, the city could be subject to a penalty that would amount to one-third of its share of the state income taxes collected for the year.

Since the money has already been collected, "we have a fair idea of the amount of the potential penalty," said Pat Wicks, city of Yuma financial director.

Wicks estimated the penalty could be about $2.8 million. That amount would be deducted from the city's share of state sales tax revenue and distributed to other cities and towns in Arizona if the penalty is imposed.

"Hopefully, it won't get that far," Wicks said last week. "By no means has it been decided."

He said the city has yet to hear from the auditor general's office on the city's most recent communication, a draft report that was submitted defending the city's action.

"We're still in the discussion process," Wicks said. "There was nothing wrong with the bond issue. We need to get the auditor general's office to agree with us. We believe we will prevail."

In a statement from the auditor general's office to the city, Michael Stelpstra wrote: "... we are aware of nothing in the Constitution, statute or case law that permits the city of Yuma to take an exclusion on the Annual Expenditure Limitation Report for expenditures of local revenues that occur before the issuance of bonds, even though such expenditures are reimbursed by bond proceeds at a later date."

Wicks, however, said the city contends it acted within the expenditure limitation law for several reasons.

The dispute centers around construction that began around 2004 on the Agua Viva Water Plant and Desert Dune Wastewater Treatment Plan to serve the rapidly growing area on the east side of the city. The city also had undertaken several major water and sewer projects throughout the city and some significant street improvement projects as well.

In 2001, city voters approved funding for the projects through loans from Arizona's Water Infrastructure Financing Authority.

As the projects progressed, it became clear they were much larger and would require the issuance of bonds, Wicks said. Further voter approval wasn't required because the bonds were issued by the city's Municipal Property Corp., to be paid off through water and sewer fees and connection fees, Wicks explained.

The sale of the bonds was delayed until late 2007, in large part because of the size of the issuance in excess of $200 million. In the interim, the city used other funds to ensure the continuation of the projects, he said. The Yuma City Council passed reimbursement resolutions in 2005 and 2006 stating that the city's intent was to pay back that interim financing through the bond sale when it occurred.

Therefore, Wicks said, the city's position is that the money should be excluded from the expenditure limitation.

Further, he said, the law states that certain sources of money are excluded from the local revenues limitation, such as any "amounts or property received from the issuance, or other lawful long-term obligations issued or incurred for a specific purpose, or any amounts or property collected or segregated to  make payments or deposits required by a contract concerning such bonds or obligations."

The law also reads that local limits excludes "any amounts or property accumulated" for improvements "if such accumulation and purpose have been approved by the voters of the political subdivision."

Residents voted on the projects with the 2001 election when they allowed the use of WIFA funds, Wicks said. "That election began the process."

And reimbursement resolutions "are a standard procedure," he said. "They're used all the time."

Wicks said if informal discussions with the auditor general fail, a formal hearing will be scheduled. While state statutes don't provide for an appeal process, Wicks said if the results of the hearing are negative, other courses of action are available to the city. He didn't specify what they may be.

---

Joyce Lobeck can be reached at jlobeck@yumasun.com or 539-6853.